Holding

An employee cannot avail both the contractual gratuity terms and the statutory gratuity terms; the blue‑pencil doctrine is inapplicable and the employee must elect either the contract scheme or the statutory scheme.

Summary

The Bank, a co‑operative society, had a gratuity scheme offering 26 days' wages per year of service with a ceiling of Rs 2.5 million. Under the Payment of Gratuity Act, 1972 (as amended), the statutory rate is 15 days' wages with a ceiling of Rs 3.5 million. After retirement, the employees claimed the benefit of both the contractual scheme and the statutory ceiling. The trial court and High Court allowed the claim, but the Supreme Court held that an employee cannot simultaneously enjoy the better contractual terms and the statutory ceiling; one must choose either the contract scheme or the statutory scheme. The Court ruled that Section 5 of Section 4 of the Act does not permit a hybrid choice and that the blue‑pencil doctrine of severability is inapplicable. Consequently, the appeal was allowed, setting aside the lower courts' orders.

Issues considered

Whether an employee can claim the benefit of both the employer's gratuity scheme and the statutory gratuity scheme under the Payment of Gratuity Act, 1972.
Whether Section 5 of Section 4 of the Payment of Gratuity Act allows a workman to opt for the better contractual terms while also retaining the statutory ceiling.
Whether the doctrine of blue‑pencil (severability) can be applied to strike out the inconsistent contractual term and give effect to the statutory provision.
How a beneficent statute should be interpreted when two possible readings exist.

Legislation cited

Arbitration and Conciliation Act, 1996s. 11(6)
Indian Contract Act, 1872s. 23
Maharashtra Co-operative Societies Act, 1960
Payment of Gratuity Act, 1972s. 4(1), s. 4(2), s. 4(3), s. 4(4), s. 4(5)

Subjects

gratuityPayment of Gratuity Actcontract interpretationbeneficial legislationblue pencil doctrineseverabilityemployee benefitsstatutory vs contractual terms

Judgment

BEED DISTRICT CENTRAL CO-OPERATIVE BANK LTD. A
v.
STATE OF MAHARASHTRA AND ORS.

SEPTEMBER 29, 2006
<
[S.B. SINHA AND DAL VEER BHANDARI, JJ.] B

Payment of Gratuity Act, 1972-Section 4-Payment of gratuity-
Employer's gratuity Scheme envisaging rate ofgratuity at the rate of 26 days'
wages/or every completed year ofservice with a ceiling limit of Rs. 2,50,0001 C
-Act of 1972 envisaging 15 days' wages with a ceiling limit of Rs. 3,50,000/
-Claim of benefit of the Scheme as also ceiling limit under the Act-
Entitlement of-Held: Either the contract or the statute has to be given
effect-Workman is not at liberty to opt for better terms of contract, while
keeping option open regarding part of the statute-Thus, workman cannot
opt for both. D
Interpretation of Statutes-Beneficial legislation-Interpretation of-
Held: When two views are possible and the Act seeks to achieve social
welfare, it may be construed in favour of the workman-However, same is not
when the workmen are not entitled to benefits thereof. only because it is a
beneficent statute. E
Doctrines-Doctrine of blue pencil-Applicability of-Employer's
gratuity &heme envisaging rate of gratuity at the rate of 26 days' wages for
every completed year of service with a ceiling limit of Rs. 2, 50, 0001-Act of
1972 envisaging 15 days' wages with a ceiling limit of Rs. 3,50,0001- F
Severance of contract by blue pencil-Held: Doctrine of blue pencil not
applicable-Payment of Gratuity Act, 1972.

Appellant-Bank had its own gratuity scheme which was one of the terms
of contract of employment between the parties. Under the scheme, employees
were entitled to gratuity on minimum 5 years of service which was to be G
calculated at the rate of 26 days' wages for every completed year of service
with a ceiling limit of Rs. 2,50,000/-. However, under the Payment of Gratuity
Act, 1972 (as amended), the rate of gratuity was to be calculated at the rate of
15 days' wages for every completed year of service with a ceiling limit of Rs.
3,50,000/-. Respondents claimed benefit of both the schemes as also the ceiling
895 II
896 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A limit fixed under the amended Act. Both the trial court and High Court upheld
the claim. Hence the present appeal.

Allowing the appeal, the Court

HELD: 1.1. The Payment of Gratuity Act, 1972 is a beneficial statute.
B When two views are possible, having regard to the purpose the Act seeks to
achieve being a social welfare legislation, it may be construed in favour of
the workman. However, it is also trite that only because a statute is beneficent
in nature, it would not mean that it should be construed in favour of the
workmen only although they are not entitled to benefits thereof. (901-C-E)

C 1.2 Applying the 'Golden Rule of Interpretation of Statute', the question
should be considered from the point of view of the nature of the scheme as
also the fact that the parties agreed to the terms thereof. When better terms
are offered, a workman takes it as a part of the package. He may volunteer
therefor, he may not. Sub-Section (5) of Section 4 of the 1972 Act provides
D for a right in favour of the workman. Such a right may be exercised by the
workman concerned. He need not necessarily do it It is the right of individual
workman and not all the workmen. When the expression "terms" have been
used, ordinarily it may mean "all the terms of the contract". (901-E-G)

1.3 While interpreting a beneficent statute, Payment of Gratuity Act,
E either contract has to be given effect to or the statute. The provisions of the
Act envisage for one scheme. It could not be segregated. Sub-Section (5) of
Section 4 of the 1972 Act does not contemplate that the workman would be at
liberty to opt for better terms of the contract, while keeping the option open
in respect of a part of the statute. While reserving his right to opt for the
beneficent provisions of the statute or the agreement, he has to opt for either
F of them and not the best of the terms of the statute as well as those of the
contract. Also the doctrine of blue pencil is not applicable to the instant case.
Therefore, the workman cannot opt for both the terms. Such a construction
would defeat the purpose for which Sub-Section (5) of Section 4 has been
enacted. (901-F-H; 902-F-Gl
G 1.4 It is significant that in the event the amount of gratuity is calculated
at the rate of26 days' salary for every completed year of service, vis-a-vis, 15
days' salary therefor, the tenure of an employee similarly situate will vary. •
Whereas in the former case an employee may receive the entire amount of
gratuity while working for a lesser period, in the latter case an employee
H drawing the same salary will have to work for a longer period. (902-E-Ff
BEED DISTRICT CENTilAL CO-OPERATIVE BANK LID. '" STA TE OF MAHARASHTRA [SINHA, J.] 897

Shin Satellite Public Co. Ltd. v. Jain Studios Ltd., [2006) 2 SCC 628 A
and Regional Director, Employees' State Insurance Corporation, Trichur v.
Ramanuja Match Industries, AIR (1985) SC 278, relied on.

Halsbury's Laws of England 4th Edn. Vol. 9, p. 297, para 430 and
Advanced Law Lexicon by P. Ramanatha Jliyar 3rd Edn. 2005, Vol. I, ·p. 553-
~ ~~~ B
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4327 of2006.

From the Judgment and final Order dated 18.8.2005 of the High Court
of Judicature of Bombay, Bench at Aurangabad in Writ Petition No. 5094 of
~ c
Uday U. Lalit, Sanjay V. Kharde and Chandan Ramamurthi for the
Appellant.

Shekhar Naphade, Uday B. Dube, B.R. Kawre, Kuldip Singh, A.V. Rangam,
A. Ranganadhan, Buddy A. Ranganadhan, A.P. Mayee and V.N. Raghupathy D
for the Respondents.

The Judgment of the Court was delivered by

S.B. SINHA, J. Leave granted.
E
Appellant (Bank) is a co-operative society registered under the
Maharashtra Co-operative Societies Act, 1960. Respondents are its employees.
On their superannuation they were entitled to payment of gratuity. A policy
J. decision was taken by the Bank to extend the benefit of better rate of gratuity
to a large number of its employees. A scheme was formulated therefor which
was linked with a policy of Life Insurance Corporation of India who were on F
its roll on and from 1.12.1975. In terms of the said scheme, the rate of gratuity
was to be calculated on one month's salary .for every completed years of
service with ceiling limit of20 months' salary. It was operative from 1975 to
19.7.1996. The employees of the Bank accepted the said scheme and availed
the benefits thereof. The said scheme was amended providing for payment G
of gratuity at the rate of 26 days' salary for every completed year of service
with a ceiling limit of Rs. 1.7 lakhs. The said scheme was operative from May,
• 1994 to 24.9.1997. Yet again, a scheme was floated raising the ceiling limit of
Rs.1.7 lakhs to Rs.2.50 lakhs. Payment of Gratuity Act, 1972 (for short, '1972
Act') was enacted by the Parliament to provide for a scheme for the payment
of gratuity to its employees engaged in factories, mines, oilfields, plantations, H
898 SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A ports, railway companies, shops or other establishments and for matters
connected therewith or incidental thereto. "Completed year of service" has
been defined to mean continuous service for one year. Payment of gratuity
is provided for in Section 4 thereof; the relevant portion whereof reac!s as
under:

B "4. Payment ofgratuity.- (I) Gratuity shall be payable to an employee
on the termination of his employment after he has rendered continuous
service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
c
(c) on his death or disablement due to accident or disease:
(2) For every completed year of service or part thereof in excess
of six months, the employer shall pay gratuity to an employee at the
rate of filteen days' wages based on the rate of wages last drawn by
D the employee concerned.

(3) The amount of gratuity payable to an employee shall not
exceed three lakhs and fifty thousand rupees.

(4) For the purpose of computing the gratuity payable to an
employee who is employed, after his disablement, on reduced wages,
E
his wages for the period preceding his disablement shall be taken to
be the wages received by him during that period, and his wages for
the period subsequent to his disablement shall be taken to be the
wages as so reduced.

F (5) Nothing in this section shall affect the right of an employee
to receive better terms of gratuity under any award or agreement or
contract with the employer."

In terms of the provisions of the said Act, the ceiling limit of the amount
of gratuity was raised to 2.50 lakhs. The rate of gratuity, however, was to be
G determined at the rate of 15 days' salary for every completed year of service.
The said ceiling limit, however, was later on increased to 3.50 lakhs by reason
of an amendment made by Payment of Gratuity (Amendment) Act, 1998 (for
short, '1998 Act'), which was given a retrospective effect from September,
1997.

H Respondents retired during the currency of the scheme of the Bank in
BEED DISTRICT CENTRAL CO-OPERATIVE BANK LTD. 1•. STA TE OF MAHARASITTRA [SINHA, I.] 899

terms whereof, although the rate of gratuity was to be calculated at the rate A
- ~ of 26 days' salary for every completed year of service, the ceiling limit thereof
was 1.7 lakhs and 2.50 lakhs between the period 20.7.1996 and 30.11.1999; and
the period 1.12.1999 and 17. 1.2005 respectively. The amount of gratuity offered
to them in terms of the scheme was accepted. However, they raised a claim
that they were entitled to the benefit of both the schemes as also the ceiling B
limit fixed under the 1998 Act. The said contention of Respondents was
accepted not only by the Deputy Commissioner of Labour, Aurangabad by
a judgment and order dated 12.7.2005, but also by the High Court in terms
of its order dated 9.8.2005.

The short question which arises for our consideration is as to whether, C
keeping in view the provisions contained in Sub-Section (5) of Section 4 of
1972 Act, Respondents herein although would be entitled to the benefit of
ceiling limit of 3.5 lakhs, the rate of gratuity should be calculated at the rate
of 26 days' instead and in place of 15 days salary for every completed year
of service in terms of the 1972 Act.
D
Mr. U.U. Lalit, learned Senior Counsel appearing on behalf of Appellant
submitted that Respondents are not entitled to the said benefit.

Mr. Shekhar Naphade, learned Senior Counsel appearing on behalf of
Respondents, on the other hand, submitted that different Sub-Sections of
Section 4 of the 1972 Act provided for different terms and in that view of the E
matter, statutory term shall prevail over the contractual term. Having regard
to the Sub-sections of Section 4, unless that portion of the contractual term,
which is contrary to or inconsistent with the statutory term, shall stand
• deleted so as to give way to the intention of the Parliament. The learned
counsel would contend that for the aforementioned purpose the contract can F
be severed upon applying the 'doctrine of blue pencil'.

It is not in dispute that Appellant-Bank had its own gratuity scheme.
The said scheme constituted one of the terms of contract of employment
between the parties. Under the scheme, employees were entitled to gratuity
on the following terms : G
(i) eligibility to receive gratuity Minimum 5 years of service
(ii) rate of gratuity 26 days' wages for every
completed year of service
(iii) the maximum amount of Rs.2,50,000/-
gratuity H
900 SUPREME COCRT REPORTS (2006) SUPP. 6 S.C.R.

A Whereas Respondents intended to have benefit of rate of gratuity
under th aforesaid terms (i) and (ii); according to them, in the above table;
term (iii) contained in the contract of employment being repugnant to Section
4(3) of the 1972 Act and void under Section 23 of the Contract Act, must be
replaced by Section 4(3) of the 1972 Act. {

B The 'doctrine of blue pencil' was evolved by the English and American
Courts. In Hals bury 's Laws of England (4th Edn. Vol. 9), p.297, para 430, it is
stated:

"430. Severance of illegal and void provisions - A contract will rarely
be totally illegal or void and certain parts of it may be entirely lawful
c in themselves. The question therefore arises whether the illegal or
void parts may be separated or "severed" from the contract and the
rest of the contract enforced without them. Nearly all the cases arise
in the context of restraint of trade, but the following principles are
applicable to contracts in general"
D In P. Ramanatha Aiyar's Advanced Law Lexicon, 3'd Edn. 2005, Vol.
l,p.553-554, it is stated:

"Blue pencil doctrine (test). A judicial standard for deciding whether
to invalidate the whole contract or only the offending words. Under
this standard, only the offending words are invalidated if it would be
E
possible to delete them simply by running a blue pencil through them,
as opposed to changing, adding, or rearranging words. (Black, 7r1t
Edn., 1999)

This doctrine holds that if Courts can render an unreasonable restraint
F reasonable by scratching out the offensive portions of the covenant,
they should do so and then enforce the remainder. Traditionally, the
doctrine is applicable only if the covenant in question is applicable,
so that the unreasonable portions may be separated. EP.I, of Cleveland,
Inc. v. Basler, 12 Ohio App2d 16:230 NE2d 552, 556.

G Blue pencil rule/test. - Legal theory that permits a judge to limit
unreasonable aspects of a covenant not to compete.

Severance of contract. - "severance can be effected when the part
severed can be removed by running a blue pencil through it without
affording the remaining part. Attwood v. Lamont, (1920) 3 K 571
H (Banking)
BEED DISTRICT CENTRAL CO-OPERATIVE BANK LTD. 1•. STA TE OF MAHARASHTRA [SINHA,J.) 9Q J

A rule in contracts a Court may strike parts or. a covenant not to A
compete in order to make the covenant reasonable. (Merriam Webster)

Phrase referring to severance (q. v.) of contract. "Severance can be
effected when the part severed can be removed by running a blue
pencil through it" without affording the remaining part. Attwood v.
Lamont, (1920) 3 KB 571. (Banking)" B
The matter has recently been considered by a learned Judge of this
Court while exercising his jurisdiction under Sub-Section (6) of Section 11 of
the Arbitration and Conciliation Act, 1996 in the case of Shin Satellite Public
Co, Ltd. v. Jain Studios Ltd., [2006] 2 SCC 628.
c
We, however, are of the opinion that the said doctrine cannot be said
to have any application whatsoever in the instant case. Undoubtedly, the
Payment of Gratuity Act is a beneficial statute. When two views are possible,
having regard to the purpose, the Act seeks to achieve being a social welfare
legislation, it may be construed in favour of the workman. However, it is also D
trite that only because a statute is beneficent in nature, the same would not
mean that it should be construed in favour of the workmen only although
they are not entitled to benefits thereof. (See Regional Director, Employees'
State Insurance Corporation, Trichur v. Ramanuja Match Industries, AIR
(1985) SC 278).
E
Applying the 'Golden Rule of Interpretation of Statute', to us it appears
that the question should be considered from the point of view of the nature
of the scheme as also the fact that the parties agr~ed to the terms thereof.
When better terms are offered, a workman takes it as a part of the package.
He may volunteer therefor, he may not. Sub-Section (5) of Section 4 of the
1972 Act provides for a right in favour of the workman. Such a right may be F
exercised by the workman concerned. He need not necessarily do it. It is the
right of individual workman and not all the workmen. When the expression
"terms" has been used, ordinarily it must mean "all the terms of the contract".
While interpreting even a beneficent statute, like, Payment of Gratuity Act,
we are of the opinion that either contract has to be given effect to or the G
statute. The provisions of the Act envisage for one scheme. It could not be
segregated. Sub-Section (5) of Section 4 of the 1972 Act does not contemplate
that the workman would be at libert)' to opt for better terms of the contract,
while keeping the option open in respect of a part of the statute. While-
reserving his right to opt for the beneficent provisions of the statute or the
agreement, he has to opt for either of them and not the best of the terms of H
902 SUPREME COL'RT REPORTS (2006) SUPP. 6 S.C.R.

A the statute as well as those of the contract. He cannot have both. If such an
interpretation is given, the spirit of the Act shall be lost. Even in Shin
Satellite (supra), this Court stated :

"The proper test for deciding validity or otherwise of an agreement
or order is "substantial severability" and not "textual divisibility". It
B is the duty of the court to sever and separate trivial or technical parts
by retaining the main or substantial part and by giving effect to the
atter if it is legal, lawful and otherwise enforceable. In such cases, the
court must consider the question whether the parties could ii.ave
agreed on the valid terms of the agreement had they known that the
other terms were invalid or unlawful. If the answer to the said question
c is in the ~ffirmative, the doctrine of severability would apply and the
valid terms of the agreement could be enforced, ignoring invalid
terms. To hold otherwise would be
"to expose the covenanter to the almost inevitable risk of litigation
which in nine cases out often he is very ill-able to afford, should
D he venture to act upon his own opinion as to how far the
restraint upon him would be held by the court to be reasonable,
while it may give the covenantee the full benefit of unreasonable
provisions if the covenanter is unable to face litigation."

It is signifo;ant that in the event the amount of gratuity is calculated
E
at the rate of 26 days' salary for every completed year of service, vis-a-vis,
15 days 5 salary therefor, the tenure of an employee similarly situate will vary.
Whereas in the former case an employee may receive the entire amount of
gratuity while working for a lesser period, in the latter case an employee
drawing the same salary will have to work for a longer period.
F
We are, therefore, of the opinion that the workman cannot opt for both
the terms. Such a construction would defeat the purpose for which Sub-
section (5) of Section 4 has been enacted. For the reasons aforementioned,
the impugned judgment cannot be sustained, which is set aside accordingly.
The appeal is allowed. No costs.
G
N.J. Appeal allowed.